Are Krugman and Wren-Lewis really saying that the problem with Europe is that Germany has increased productivity too much, and they need to take more naps like their neighbors to the south who keep asking them for more money?

One of the most ardent supporters of Keynesian economics, Professor Paul Krugman, has just published an interesting article about the root cause of Europe’s stagnation. It is very common to assume that the core of Europe’s issues was brought on by budget excess in southern Europe, for which the continent is now paying. However, Krugman argues a very different point—that, in fact, it was Germany that has been responsible for Europe’s problems. By looking at the average cost of produced goods versus the average rise in unit labour costs, most of Europe’s countries, including much maligned France, Italy, and Spain, all have had what economists consider healthy numbers, with both figures at just under 2%. However, Germany, on the other hand, has been running a deflationary trend, with produced goods prices rising just 1.0%, and unit labour costs just 0.5%. This effectively means that Germany’s compression of costs on both ends has exported deflation to its neighbours, and in turn, has dragged down the whole Eurozone despite its individual success.

OxWFD: Krugman is certainly outspoken and opinionated, but his argument here is quite interesting. Germany has mostly been blamed for refusing to agree to measures to help the Eurozone, but the idea that its policies might be the root cause of the issue is intriguing to consider.